Rally! Is this one for real?
A nice snap-back rally is underway, and – given the oversold conditions from which it developed – I wouldn’t want to underestimate its upside potential. However, the market has a lot of work to do if it’s going to reverse the currently negative intermediate- and longer-term weekly trend picture.
So, while the current rally likely has further to go, I’ll be looking to sell covered calls into it if given the opportunity. Upside “resistance” levels to watch on the major indices are about 1280-1290 (S&P500), 11,200 (DJIA), and 2250 (NASDAQ).
Options expiration results
- Fresh Del Monte (FDP) – The June 17 1/2-strike covered calls I sold on 5/25 against my long position expired just out of the money (OTM), for a three-week net return of about 3.6%.
- Anheuser Busch (BUD) – The June 45-strike puts I sold on 6/5 expired OTM, for a two-week net return* of about 1.1%.
New positions
Freeport McMoran (FCX) – On Tuesday I sold some July 35-strike puts on FCX as it and other metals stocks continued their recent sharp decline. As it turned out, this turned out to be at least a short-term bottom:
There’s plenty of room for these stocks to fall further, and if they do, I’ll likely be doing some more put selling in this sector. In the meantime, I’d be happy to own FCX at $35 if it’s put to me, so I’m not rushing to take a quick profit on my short puts position either.
Ameren (AEE) – Late last week I sold some July 50-strike calls against my long position in AEE:
While utilities are currently one of the best performing sectors, they’re still presenting a pretty mixed picture (see the current sector ETF trend analysis), with only a handful of currently identifiable trends reflected in their trend spectrum chart. If the stock is called, I’ll have made a decent profit – and collected a dividend payment; if not, I’ll have significantly lowered my net cost basis in the position.
Watchlist
A couple of new stocks of interest on the “upside strength” list include Exelon (EXC) and Overseas Shipholding Group (OSG).
There are lots of stocks to choose from in the “oversold” category, including American International Group (AIG), Dollar General (DG), Dow Chemical (DOW), Federal Home Loan Mortgage (FRE), Federal National Mortgage Association (FNM), Masco (MAS), Microsoft (MSFT), Pfizer (PFE), and Triad Hospitals (TRI).
* As always, the return on these “cash secured” put sales was based on the premium received from the sale of the options (minus commissions) against the unmargined capital set aside to pay for the possible assignment of the stock.
